Small Business Investment Companies-Early Stage SBICs, 6664-6668 [2014-02225]
Download as PDF
<![CDATA[
6664
Federal Register / Vol. 79, No. 23 / Tuesday, February 4, 2014 / Notices
public interest, provided that the selfregulatory organization has given the
Commission written notice of its intent
to file the proposed rule change at least
five business days prior to the date of
filing of the proposed rule change or
such shorter time as designated by the
Commission,11 the proposed rule
change has become effective pursuant to
Section 19(b)(3)(A) of the Act 12 and
Rule 19b–4(f)(6) thereunder.13 At any
time within 60 days of the filing of such
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
mstockstill on DSK4VPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2014–009 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2014–009. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
11 The
Exchange has fulfilled this requirement.
U.S.C. 78s(b)(3)(A).
13 17 CFR 240.19b–4(f)(6).
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the CBOE. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2014–009 and should be submitted on
or before February 25, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–02243 Filed 2–3–14; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
Reporting and Recordkeeping
Requirements Under OMB Review
Small Business Administration.
30-Day notice.
AGENCY:
ACTION:
The Small Business
Administration (SBA) is publishing this
notice to comply with requirements of
the Paperwork Reduction Act (PRA) (44
U.S.C. Chapter 35), which requires
agencies to submit proposed reporting
and recordkeeping requirements to
OMB for review and approval, and to
publish a notice in the Federal Register
notifying the public that the agency has
made such a submission. This notice
also allows an additional 30 days for
public comments.
DATES: Submit comments on or before
March 6, 2014.
ADDRESSES: Comments should refer to
the information collection by name and/
or OMB Control Number and should be
sent to: Agency Clearance Officer, Curtis
Rich, Small Business Administration,
409 3rd Street SW., 5th Floor,
Washington, DC 20416; and SBA Desk
Officer, Office of Information and
Regulatory Affairs, Office of
Management and Budget, New
Executive Office Building, Washington,
DC 20503.
FOR FURTHER INFORMATION CONTACT:
Curtis Rich, Agency Clearance Officer,
(202) 205–7030 curtis.rich@sba.gov
SUMMARY:
12 15
VerDate Mar<15>2010
20:14 Feb 03, 2014
Jkt 232001
14 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00134
Fmt 4703
Sfmt 4703
Copies: A copy of the Form OMB 83–
1, supporting statement, and other
documents submitted to OMB for
review may be obtained from the
Agency Clearance Officer.
SUPPLEMENTARY INFORMATION: SBA
recently updated the Standard
Operating Procedures (SOP) that
governs the Agency’s primary loan
programs. As a result of this update,
various lender and loan applicant forms
were eliminated and the information
consolidated with other forms.
Specifically, with respect to this
information collection, SBA is
eliminating Form 2301 Parts A, B, C and
D and retaining Part E, Community
Advantage Lender Participation
Application only which will be referred
to as simply Form 2301, Community
Advantage Lender Participation
Application SBA is also eliminating
Form 7 from this collection. The
information previously collected by the
eliminated forms has been consolidated
with SBA Form 1919 and SBA Form
1920 (OMB Control No. 3245–0348) for
use by lenders and applicants in the
Lender Advantage program.
Estimated Annual Respondents: 25.
Estimated Annual Responses: 25.
Estimated Annual Hour Burden: 175.
Title: Community Advantage Lender
Participation Application Description of
Respondents: SBA Lender Participants.
Form Number: 2301E.
Curtis B. Rich,
Management Analyst.
[FR Doc. 2014–01997 Filed 2–3–14; 8:45 am]
BILLING CODE 8025–01–M
SMALL BUSINESS ADMINISTRATION
Small Business Investment
Companies—Early Stage SBICs
U.S. Small Business
Administration.
ACTION: Call for Early Stage Fund
Managers.
AGENCY:
This call for proposals
(‘‘Call’’) invites experienced early stage
fund managers to submit the
preliminary materials discussed in
Section II below, in the form of the
Small Business Investment Company
(‘‘SBIC’’) Management Assessment
Questionnaire (‘‘MAQ’’), for
consideration by the Small Business
Administration (‘‘SBA’’) to be licensed
as Early Stage Small Business
Investment Companies. Licensed Early
Stage SBICs may receive SBAguaranteed debenture leverage of up to
100 percent of their Regulatory Capital,
up to a maximum of $50 million.
However, Early Stage SBICs may request
SUMMARY:
E:\FR\FM\04FEN1.SGM
04FEN1
Federal Register / Vol. 79, No. 23 / Tuesday, February 4, 2014 / Notices
less than 100 percent of their Regulatory
Capital. Importantly, Early Stage SBICs
must invest at least 50% of their
investment dollars in early stage small
businesses. For the purposes of this
initiative, an ‘‘early stage’’ business is
one that has never achieved positive
cash flow from operations in any fiscal
year. By licensing and providing SBA
guaranteed leverage to Early Stage
SBICs, SBA seeks to expand
entrepreneurs’ access to capital and
encourage innovation as part of
President Obama’s Start-Up America
Initiative launched on January 31, 2011.
More information on the Early Stage
Milestones
6665
SBIC Initiative and the regulations
governing these SBICs may be found at
www.sba.gov/inv/earlystage.
The following table provides the
key milestones for the Early Stage SBIC
Initiative.
DATES:
Dates/times
Question and Answer Period Closed .......................................................
Initial Review Period:
Management Assessment Questionnaires (‘‘MAQs’’) Due ...............
Interview Period .................................................................................
Anticipated Green Light Decision ......................................................
Licensing Periods:
For funds seeking a license in FY 2014 ...........................................
Anticipated Licensing Date for FY 2014 funds .................................
All other funds have 12 months from issuance of a Green Light to
submit their license application.
5 p.m. Eastern Time (‘‘EST’’) on March 28, 2014.
5 p.m. EST—March 28, 2014.
May 26, 2014–June 5, 2014.
May 26, 2014–June 5, 2014.
5 p.m. EST June 30, 2014.
No later than September 30, 2014.
Applications considered as they are received.
Notes:
• SBA reserves the right to extend its interview, due diligence, committee, and approval timelines as appropriate. SBA will update its website
at www.sba.gov/inv/earlystage should these dates change. Applicants will be notified by e-mail should these dates change.
• SBA expects to issue additional calls for Early Stage Fund Managers on an annual basis. SBA will announce these calls via a call notice in
the Federal Register.
Visit www.sba.gov/inv/MAQ
to download a copy of the Management
Assessment Questionnaire (the
‘‘MAQ’’). You must submit via express
or next day delivery service (i) the
relevant MAQ signature pages and (ii)
the completed MAQ on a CD–ROM in
Word and Excel format to the following:
Scott Schaefer, Senior Investment
Officer, Office of Investment and
Innovation, U.S. Small Business
Administration, 409 3rd St. SW., Suite
#6300, Washington, DC 20416.
SBA will not accept MAQs in .pdf
format or MAQs delivered via regular
mail (due to irradiation requirements),
or hand delivery or courier service.
ADDRESSES:
SUPPLEMENTARY INFORMATION:
mstockstill on DSK4VPTVN1PROD with NOTICES
I. Background Information
SBA invites early stage fund managers
to submit the preliminary materials, as
discussed in Section II below, in the
form of a Management Assessment
Questionnaire (‘‘MAQ’’) for the
formation and management of an Early
Stage SBIC. In 2012, SBA introduced the
Early Stage Initiative. Early Stage SBICs
represent a new sub-category of SBICs
that will focus on making investments
in early stage small businesses. Go to
www.sba.gov/inv/earlystage for
information on the Early Stage Initiative
and links to the Early Stage SBIC Final
Rule (‘‘Final Rule’’). This initiative is
part of President Obama’s ‘‘Start-Up
America Initiative’’ to promote
American innovation and job creation
by encouraging private sector
investment in job-creating startups and
small firms, accelerating research, and
VerDate Mar<15>2010
20:14 Feb 03, 2014
Jkt 232001
addressing barriers to success for
entrepreneurs and small businesses.
II. Management Assessment
Questionnaire/License Application
Materials
The first required submission in the
Early Stage Licensing process is SBA’s
MAQ. The MAQ consists of two forms
that cover qualitative and quantitative
information on the management team,
the proposed strategy for the SBIC, the
principals’ investment track record, and
the proposed fund structure and
economics. The MAQ consists of SBA
Form 2181 and Exhibits A–F of Form
2182.
Should SBA issue you a ‘‘Green Light
letter,’’ you must submit the SBIC
License Application, consisting of SBA
Form 2181, 2182 and 2183 (updated to
reflect any changes), for the final
licensing phase. Exhibit O in SBA Form
2183 includes the fund’s limited
partnership agreement (‘‘LPA’’).
Applicants should review this notice for
special instructions associated with the
LPA for Early Stage SBICs.
III. Early Stage Licensing Process
There are four stages in SBA’s Early
Stage Licensing Process: (A) Call Period;
(B) Initial Review; (C) Applicant
Fundraising and Document Preparation;
and (D) Licensing. Each of these stages
is discussed below.
A. Call Period. This notice signals the
start of the Fiscal Year 2014 Early Stage
SBIC call period. SBA intends to hold
one Early Stage SBIC call period for
accepting MAQs per fiscal year and SBA
will issue a new notice in the Federal
Register for the next call period.
PO 00000
Frm 00135
Fmt 4703
Sfmt 4703
Interested parties should download a
MAQ from www.sba.gov/inv/MAQ. You
should also review the information at
www.sba.gov/inv/earlystage which
includes a list of frequently asked
questions (‘‘FAQs’’) regarding the Early
Stage Initiative. If you still have
questions regarding the Early Stage
process, please email your questions to
erikka.robinson@sba.gov. SBA will
endeavor to respond to your question
within three business days, depending
on volume. SBA may not be able to
respond to fund-specific questions or
questions that require a legal opinion.
SBA will not take any further questions
after the end of the Question and
Answer Period identified under the
Dates section.
B. Initial Review. At the end of the
Initial Review phase, SBA will issue a
Green Light letter to those applicants
that have preliminarily met the
evaluation criteria for an Early Stage
SBIC, including the vintage year and
geographic diversification criteria. The
process for SBA’s Initial Review is as
follows:
1. Submit MAQ. SBA must receive
your completed MAQ no later than the
date and time specified under the Dates
section of this notice. SBA will send a
confirmation that it has received your
MAQ within three business days of your
submission. If you have not fully
completed all sections of the MAQ or
provided sufficient information to allow
SBA to evaluate your management team,
you may be ineligible for this call
period. If so, SBA will notify you by
email.
E:\FR\FM\04FEN1.SGM
04FEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
6666
Federal Register / Vol. 79, No. 23 / Tuesday, February 4, 2014 / Notices
2. Due Diligence. SBA will review all
MAQs against the evaluation criteria
identified in this notice. SBA may
engage a contractor to assist in
evaluating MAQs received in response
to this Call. The Investment Committee
(composed of senior managers from the
Office of Investment and Innovation)
will consider each MAQ, and if the
Investment Committee concludes that
the management team may be qualified
for an Early Stage SBIC license, the
entire team will be invited to SBA
Headquarters at 409 Third Street, SW.,
Washington, DC for an interview. Those
applicants not invited for interviews
will be notified. After September 30,
2014, SBA will provide feedback upon
request to applicants not selected for an
interview.
3. Interview Period. SBA’s invitation
for an interview will identify a 1-hour
time block during the Interview Period
identified in the Dates Section, along
with the topics that the applicant
should be prepared to address. SBA will
conduct interviews at SBA
Headquarters.
Applicants seeking to be licensed by
the end of the fiscal year—i.e.,
September 30, 2014—must bring the
following completed exhibits from SBA
Form 2182 to the Interview:
a. Exhibit G—Fingerprint cards and
b. Exhibit I—Statements of Personal
History.
If the applicant receives a Green Light
letter, SBA will forward the fingerprint
cards and Statements of Personal
History to SBA’s Office of Inspector
General for processing by the FBI.
4. Green Light Letter. Following the
interview, the SBA will issue a Green
Light letter to all applicants that have
met the criteria identified in this notice,
as determined by the Investment
Committee. Applicants approved by the
Investment Committee can expect to
receive the Green Light letter via email
within a few days of the Investment
Committee’s decision. The Green Light
letter formally invites an applicant to
submit its application for an SBIC
License. The Green Light letter is only
an invitation to proceed to the next
stage in the process, not a guarantee that
a fund will be issued an Early Stage
SBIC license. Those applicants that do
not receive a Green Light letter will also
be notified by email within a few days
of the Investment Committee’s decision.
After September 30, 2014, SBA will
provide feedback upon request to those
applicants that do not receive a Green
Light letter.
C. Fundraising and Document
Preparation. If you receive a Green Light
letter, you will need to raise the
minimum Regulatory Capital needed to
VerDate Mar<15>2010
20:14 Feb 03, 2014
Jkt 232001
execute your strategy (which can be no
less than $20 million) and submit your
completed license application within
one year from the date of the letter.
1. Raise Regulatory Capital. An Early
Stage SBIC applicant must have signed
capital commitments for at least $20
million in Regulatory Capital prior to
filing its license application.
2. SBIC Education. All principals of
the Early Stage SBIC applicant must
attend a one-day SBIC Regulations
training class. This training is held at
least three times per year in
Washington, DC. The purpose of this
class is to familiarize principals with
the SBIC rules, regulations and
compliance procedures. Although an
applicant may receive a license before
all principals have completed the
training, a majority of principals must
do so before licensing and all must do
so before a licensed Early Stage SBIC
will be permitted to draw leverage.
Information concerning registration for
classes can be obtained at www.sbia.org.
Certain non-principals such as members
of a board of directors may also be
required to take the class. In addition,
any employees or consultants whom
you have assigned to handle regulatory
matters or to interact with the Office of
Investment and Innovation should
attend the class.
3. Finalize Documents & Perform
Checklist. The following items must be
completed and submitted in order to
proceed to the Licensing phase:
ÿ
Item
Updated SBA Form 2181 ........................
SBA Form 2182 & 2183 ..........................
At least $20 million in Regulatory Capital
evidenced by signed Capital Certificate
in Form 2183 (Exhibit K).
$25,000 Non-refundable licensing fee .....
D. Licensing. During this last stage,
SBA will review your completed
application, perform further due
diligence and analysis as needed, and
make the final licensing decision.
Applicants that receive Green Light
letters in 2014, and wish to be licensed
in FY 2014, will need to submit their
completed license application no later
than 5 p.m. EST on June 30, 2014, and
follow all guidance identified in this
notice. Applicants that do not comply
with the requirements in this notice risk
not receiving a license in FY 2014. All
other applicants must apply within one
year of the issuance of their Green Light
letter. The process for Licensing is
detailed below.
1. SBA acceptance of license
application. Upon receipt of the
application, SBA will acknowledge
receipt by email. Within three business
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
days, SBA will determine whether the
application is complete, meets the
minimum capital requirements and
satisfies management ownership
diversity requirements. If so, SBA will
send the applicant an acceptance letter.
If not, SBA will ask the applicant to
resolve the issues identified.
2. Background and Documentation
Review. Once the application has been
accepted, SBA will forward the
fingerprint cards and Statements of
Personal History to SBA’s Office of
Inspector General for processing by the
FBI if the applicant did not previously
submit such information during or after
the interview. Following a review of the
application and legal documents, SBA
will provide the applicant with a
‘‘comment letter.’’ Applicants must
respond in writing to the comment
letter. Applicants seeking to be licensed
in Fiscal Year 2014 should make every
effort to respond to SBA’s comments
within one week. Other applicants
should respond as quickly as possible,
but in any event within 30 days. Failure
to address all comments to SBA’s
satisfaction will slow down the
licensing process. Please note that prelicensing investments, which SBA must
review and approve before they are
closed, will also add to the licensing
time.
3. Divisional Licensing Committee.
After SBA’s licensing staff and Office of
General Counsel have completed their
review, the license application is
presented to the Divisional Licensing
Committee. This committee is
composed of the senior managers of the
Office of Investment and Innovation. If
approved by the Divisional Licensing
Committee, the application is forwarded
to the Agency Licensing Committee
which is comprised of certain senior
managers of the SBA. Prior to
consideration by the Agency Licensing
Committee, an applicant must provide a
signed, up-to-date capital certificate
showing that it has at least $2.5 million
in Leverageable Capital, consisting of
cash on deposit, approved pre-licensing
investments funded with partners’
contributed capital, and/or approved
organizational and operational expenses
paid out of partners’ contributed capital,
and at least $20 million in Regulatory
Capital. The applicant’s bank must
certify that the requisite funds are in the
applicant’s account and unencumbered.
4. Agency Licensing Committee and
Administrator Approval. If the Agency
Licensing Committee recommends
approval of your license application, it
will be forwarded to the SBA
Administrator or her designee for final
action as soon as you submit fully
executed copies of all legal documents.
E:\FR\FM\04FEN1.SGM
04FEN1
Federal Register / Vol. 79, No. 23 / Tuesday, February 4, 2014 / Notices
mstockstill on DSK4VPTVN1PROD with NOTICES
(Please note that the executed
documents must be identical to the
‘‘final form’’ of the documents approved
by SBA.) If the Administrator or her
designee approves your application,
your Early Stage SBIC license is issued.
5. Leverage Commitments. SBA has
allocated $200 million in Fiscal Year
(‘‘FY’’) 2014 for Early Stage SBICs. SBA
expects to allocate another $200 million
in each of FYs 2015 and 2016. SBA
expects to be able to commit the full
amount of leverage that an Early Stage
SBIC requests at the time of licensing.
If total leverage commitments requested
for the FY 2014 licensing cycle exceed
the amount available in FY 2014, SBA
will allocate available leverage across all
FY2014 Early Stage SBICs on a pro rata
basis. Early Stage SBICs licensed in
FY2014 will be eligible to request the
remainder of their uncommitted
leverage request in subsequent fiscal
years based on availability. Early Stage
SBICs that raise additional private
capital after licensing may request
leverage commitments against that
capital. However, such requests are
subject to leverage availability and will
not be considered until all other
licensee requests are satisfied.
IV. Early Stage SBIC LPA and
Organizational Instructions
A. Early Stage SBIC Model LPA. In
order to expedite the review of Early
Stage SBIC license applications, SBA
has adopted a Model Early Stage SBIC
Limited Partnership Agreement (‘‘Model
LPA’’). The Model LPA includes
required provisions shown in Bold Arial
type and optional provisions in a
different font. You must download the
Model LPA at https://www.sba.gov/
content/model-participating-securitysbic-l. Applicants must use the Model
LPA as a template and must follow the
organizational structure of the Model
LPA. Further, Applicants must include
in their limited partnership agreements
all of the required provisions of the
Model LPA that appear in Bold Arial
type. SBA will not accept additions,
deletions and other changes or
modifications to any of those required
provisions. Applicants are required to
submit a copy of their limited
partnership agreement black-lined
against the Model LPA, as explained in
the instructions provided at the
beginning of the Model LPA. SBA
provides the following further guidance
on limited partnership agreements:
1. SBA encourages applicants to
adhere to the Model LPA to the
maximum extent possible. Although
SBA does not prohibit changes to those
Model LPA provisions that do not
appear in Bold Arial type, such changes
VerDate Mar<15>2010
20:14 Feb 03, 2014
Jkt 232001
must be explained in a narrative
accompanying the applicant’s limited
partnership agreement. The entire
agreement is subject to SBA’s approval.
2. Conditions or restrictions on the
ability of the general partner to call
private capital commitments are limited
to those permitted by the Model LPA.
3. Withdrawal rights are limited to
those permitted by the Model LPA.
4. Applicants must adhere to SBA’s
management fee policies available at
https://www.sba.gov/sites/default/files/
files/SBICTechnote07arev200804.pdf.
This policy sets a maximum allowable
management fee only. The actual
management fee will be set by
negotiation between the management
team and the limited partners and may
be less than the maximum. Early Stage
SBIC applicants should be aware that
the calculation of an SBIC’s capital
impairment percentage is affected by all
fund expenses, including management
fees. SBA will consider the management
fee in its licensing evaluation criteria as
part of fund economics. SBA believes
that the primary incentive for fund
managers should be carried interest
rather than fees.
5. The designation of fund expenses
and expenses to be paid out of the
management fee must be consistent with
SBIC program regulations (see 13 CFR
107.520).
a. Organizational costs, expenses
incurred in applying for a license and
forming the SBIC and its entity general
partner (but not its parent fund or any
other affiliate), are considered a
partnership expense. Organizational
expenses typically include items such
as the licensing fee, cost of legal and
other professional and consulting
services, travel and other fundraising
expenses, costs of preparing, printing
and distributing the private placement
memorandum or other offering
materials, and other related expenses
such as telephone and supply costs.
SBA strongly encourages applicants to
include in the LPA a reasonable cap on
the total organizational costs to be paid
by the applicant. Costs that SBA deems
excessive can be paid by an affiliate of
the applicant or deducted from the
applicant’s Regulatory Capital prior to
licensing (Regulatory Capital must still
be at least $20 million after the
deduction).
b. Unreimbursed expenses on deals
that do not close may be designated as
a partnership expense but must be
capped at a reasonable level.
6. Right of limited partners to remove
general partner—Provisions allowing
removal of the general partner without
cause (‘‘no-fault divorce’’ provisions)
are permitted only after the Early Stage
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
6667
SBIC has repaid all outstanding leverage
and any other amounts payable to SBA
and has surrendered its SBIC license.
7. Any amendments to the limited
partnership required by SBA must be
executed before licensing. Any
amendments initiated by the applicant
during the licensing process must be
submitted to SBA in draft form as early
as possible. SBA will not consider
amendments to an Early Stage SBIC’s
LPA for a minimum of six months after
licensing.
B. Organization. Early Stage SBIC
applicants must adhere to the following
rules regarding organizational structure:
1. Applicant cannot be a BDC or other
public entity or a subsidiary of any such
entity.
2. All provisions governing the
operation of the SBIC must be included
in the limited partnership agreement. A
side letter between the applicant (or its
general partner) and an investor may
supplement the limited partnership
agreement but may not supersede it. In
the event of a conflict between the
limited partnership agreement and the
side letter, the limited partnership
agreement shall control. If an investor
requests a side letter provision that is of
general interest to all investors (e.g., a
provision regarding the fund’s efforts to
invest in certain geographic areas), that
provision should be incorporated into
the limited partnership agreement. All
side letters require SBA’s prior written
approval.
3. Applicant must adopt SBA Model
Valuation Guidelines.
4. Drop-down SBICs
a. The drop-down structure should be
used only when it has a clear business
purpose:
i. Example 1—Parent fund has already
raised capital and begun operating and
wants to commit a portion of its capital
to an Early Stage SBIC.
ii. Example 2—Substantial capital
will be retained for investment at the
parent level (SBA suggests that
managers consider the alternative of
structuring a non-SBIC fund side by side
with the SBIC).
b. Drop-down funds must have one
parent fund only and the parent fund
must be a U.S. entity.
c. Parent must qualify as a traditional
investment company based on
established SBA precedent.
d. Parent must disclose the identity of
all of its investors.
e. All of the investors in the parent
fund (the SBIC’s ‘‘Class A’’ limited
partner) must agree to be ‘‘Class B’’
limited partners of the SBIC with an
obligation to fund the Early Stage SBIC
capital calls if the Class A limited
partner does not. The obligation of the
E:\FR\FM\04FEN1.SGM
04FEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
6668
Federal Register / Vol. 79, No. 23 / Tuesday, February 4, 2014 / Notices
Class B limited partners to the Early
Stage SBIC is reduced dollar for dollar
as the parent fund contributes capital to
the SBIC. The Model LPA contains
required provisions for drop-down
funds.
f. The Class B limited partners’
commitments to the SBIC applicant
must be expressed as a specific dollar
amount (not just as the ‘‘proportionate
share’’ of parent fund’s commitment).
g. The total dollar amount of Class B
commitments must be equal to the Class
A limited partner’s unfunded
commitment to the SBIC. SBA will not
require Class B commitments if the
SBIC’s Regulatory Capital will not
include any unfunded commitments
from the Class A limited partner.
C. Capitalization. Applicants must
raise the minimum $20 million in
Regulatory Capital by the time the
license application is submitted.
1. Capital commitments from limited
partners must be made directly to the
SBIC (and its parent fund, in the case of
a drop-down) with no intermediaries
involved.
2. The Early Stage SBIC applicant
must have the unconditional ability to
legally enforce collection of each capital
commitment.
3. Capital Certificate. Capital
commitments must be documented in
the capital certificate (Exhibit K of SBA
Form 2183) and comply with the
following:
a. A signed Capital Certificate must be
submitted with the license application.
b. The only permitted condition on
private capital commitments is:
i. Receipt of Early Stage SBIC license.
c. Individual investors must list
primary residence address, not a
business address.
d. Street addresses are required (no
P.O. Box addresses).
4. A dual commitment may be
obtained to back up the commitment of
any direct investor in the SBIC who is
not an Institutional Investor.
5. Capital commitments by the
principals, general partner, or their
affiliates must be payable in cash when
called (cannot be satisfied with notes or
management fee waivers).
D. General Partner
1. All principals must:
a. Hold direct ownership interests in
and be the direct individual managers of
the general partner, with no intervening
entities.
b. Receive carried interest directly
from the general partner; for drop-down
SBICs, carried interest may be received
from the parent fund’s general partner.
2. A maximum of 25% of the carried
interest may be allocated to nonprincipals.
VerDate Mar<15>2010
20:14 Feb 03, 2014
Jkt 232001
3. Any provision to remove or
terminate a principal must be spelled
out within the general partner’s
organizational document and must not
be tied to events occurring under other
agreements (e.g., a principal’s
employment agreement with the
management company).
E. Investment Advisor (‘‘Management
Company’’). Ownership of the
Management Company that is highly
disproportionate to the ownership of the
general partner (e.g., one principal is the
100% owner) is not viewed favorably by
SBA, but may be acceptable if there are
adequate checks and balances on the
powers of the dominant owner. Areas
that cannot be subject to unilateral
decision-making include the following:
1. Power to remove or terminate other
principals.
2. Power to change the composition of
the Early Stage SBIC’s investment
committee.
V. Early Stage SBIC Licensing
Evaluation Criteria
A. General Criteria. SBA will evaluate
an Early Stage SBIC license applicant
based on the submitted application
materials, Investment Committee
interviews with the applicant’s
management team, and the results of
background investigations, public
record searches, and other due diligence
conducted by SBA and other Federal
agencies. SBA will evaluate an Early
Stage SBIC license applicant based on
the same factors applicable to other
license applicants, as set forth in 13 CFR
§ 107.305, with particular emphasis on
managers’ skills and experience in
evaluating and investing in early stage
companies. As discussed in the Final
Rule, evaluation criteria fall into four
areas: (A) Management Team; (B) Track
Record; (C) Proposed Investment
Strategy; and (D) Organizational
Structure and Fund Economics. You
should review these regulations prior to
completing your MAQ.
B. Managing SBA Leverage. SBA will
pay particular attention to how a team’s
investment strategy works with
proposed SBA leverage. Early Stage
Debenture leverage either requires a 5
year interest and annual charge reserve
from the date of issue or is structured
with an original issue discount that
covers the interest and annual charges
for the first 5 years. In either case, Early
Stage SBICs must identify how quarterly
interest payments beginning in the 6th
year from Debenture issue will be met.
Sources of liquidity to make interest
payments may include (a) private
capital; (b) realizations; or (c) current
income. As part of your plan of
operations, you should carefully
PO 00000
Frm 00138
Fmt 4703
Sfmt 4703
consider how your investment strategy
will work with SBA leverage and make
appropriate suggestions to manage risk.
Risk mitigation strategies might include
making some investments in current pay
instruments, taking down less than a
full tier of leverage (i.e., leverage less
than 100% of Regulatory Capital), taking
leverage down later in the fund’s life,
lowering management expenses, and
reserving more private capital. The
strategies you choose to employ should
be appropriate for your management
team’s track record and investment
strategy.
C. SBA Diversification Rights. Per 13
CFR 107.320, SBA reserves the right to
maintain diversification among Early
Stage SBICs with respect to (i) the year
in which they commence operations
(‘‘vintage year’’) and (ii) geographic
location.
1. Vintage Year Diversification.
Vintage year has a major impact on the
return expectations of a fund and
excessive concentration in a single year
could substantially increase program
risk. Therefore, SBA reserves the right,
when licensing Early Stage SBICs, to
maintain diversification across vintage
years. SBA believes that it will be able
to manage vintage year diversification
through its call process. If SBA receives
an extraordinary number of qualified
applicants in FY 2014, it may not
approve all such applicants.
2. Geographic Diversification. All
Early Stage SBICs must first meet SBA’s
basic licensing criteria. After those
criteria are met, SBA reserves the right
to maintain diversification among Early
Stage SBICs with respect to the
geographic location in which the Early
Stage SBIC expects to invest.
Javier Saade,
Associate Administrator, Office of Investment
and Innovation.
[FR Doc. 2014–02225 Filed 2–3–14; 8:45 am]
BILLING CODE 8025–01–P
DEPARTMENT OF STATE
[Public Notice 8619]
In the Matter of the Designation of
Ziyad al-Nakhalah Also Known as
Ziyad Rushdi al-Nakhalah Also Known
as Ziyad Rushdi Husayn Also Known
as Abu Tariq as a Specially Designated
Global Terrorist Pursuant to Section
1(b) of Executive Order 13224, as
Amended
Acting under the authority of and in
accordance with section 1(b) of
Executive Order 13224 of September 23,
2001, as amended by Executive Order
13268 of July 2, 2002, and Executive
E:\FR\FM\04FEN1.SGM
04FEN1
]]>Agencies
[Federal Register Volume 79, Number 23 (Tuesday, February 4, 2014)]
[Notices]
[Pages 6664-6668]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02225]
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
Small Business Investment Companies--Early Stage SBICs
AGENCY: U.S. Small Business Administration.
ACTION: Call for Early Stage Fund Managers.
-----------------------------------------------------------------------
SUMMARY: This call for proposals (``Call'') invites experienced early
stage fund managers to submit the preliminary materials discussed in
Section II below, in the form of the Small Business Investment Company
(``SBIC'') Management Assessment Questionnaire (``MAQ''), for
consideration by the Small Business Administration (``SBA'') to be
licensed as Early Stage Small Business Investment Companies. Licensed
Early Stage SBICs may receive SBA-guaranteed debenture leverage of up
to 100 percent of their Regulatory Capital, up to a maximum of $50
million. However, Early Stage SBICs may request
[[Page 6665]]
less than 100 percent of their Regulatory Capital. Importantly, Early
Stage SBICs must invest at least 50% of their investment dollars in
early stage small businesses. For the purposes of this initiative, an
``early stage'' business is one that has never achieved positive cash
flow from operations in any fiscal year. By licensing and providing SBA
guaranteed leverage to Early Stage SBICs, SBA seeks to expand
entrepreneurs' access to capital and encourage innovation as part of
President Obama's Start-Up America Initiative launched on January 31,
2011. More information on the Early Stage SBIC Initiative and the
regulations governing these SBICs may be found at www.sba.gov/inv/earlystage.
DATES: The following table provides the key milestones for the Early
Stage SBIC Initiative.
------------------------------------------------------------------------
Milestones Dates/times
------------------------------------------------------------------------
Question and Answer Period Closed...... 5 p.m. Eastern Time (``EST'')
on March 28, 2014.
Initial Review Period:
Management Assessment 5 p.m. EST--March 28, 2014.
Questionnaires (``MAQs'') Due.
Interview Period................... May 26, 2014-June 5, 2014.
Anticipated Green Light Decision... May 26, 2014-June 5, 2014.
Licensing Periods:
For funds seeking a license in FY 5 p.m. EST June 30, 2014.
2014.
Anticipated Licensing Date for FY No later than September 30,
2014 funds. 2014.
All other funds have 12 months from Applications considered as they
issuance of a Green Light to are received.
submit their license application.
------------------------------------------------------------------------
Notes:
SBA reserves the right to extend its interview, due diligence,
committee, and approval timelines as appropriate. SBA will update its
website at www.sba.gov/inv/earlystage should these dates change.
Applicants will be notified by e-mail should these dates change.
SBA expects to issue additional calls for Early Stage Fund
Managers on an annual basis. SBA will announce these calls via a call
notice in the Federal Register.
ADDRESSES: Visit www.sba.gov/inv/MAQ to download a copy of the
Management Assessment Questionnaire (the ``MAQ''). You must submit via
express or next day delivery service (i) the relevant MAQ signature
pages and (ii) the completed MAQ on a CD-ROM in Word and Excel format
to the following: Scott Schaefer, Senior Investment Officer, Office of
Investment and Innovation, U.S. Small Business Administration, 409 3rd
St. SW., Suite 6300, Washington, DC 20416.
SBA will not accept MAQs in .pdf format or MAQs delivered via
regular mail (due to irradiation requirements), or hand delivery or
courier service.
SUPPLEMENTARY INFORMATION:
I. Background Information
SBA invites early stage fund managers to submit the preliminary
materials, as discussed in Section II below, in the form of a
Management Assessment Questionnaire (``MAQ'') for the formation and
management of an Early Stage SBIC. In 2012, SBA introduced the Early
Stage Initiative. Early Stage SBICs represent a new sub-category of
SBICs that will focus on making investments in early stage small
businesses. Go to www.sba.gov/inv/earlystage for information on the
Early Stage Initiative and links to the Early Stage SBIC Final Rule
(``Final Rule''). This initiative is part of President Obama's ``Start-
Up America Initiative'' to promote American innovation and job creation
by encouraging private sector investment in job-creating startups and
small firms, accelerating research, and addressing barriers to success
for entrepreneurs and small businesses.
II. Management Assessment Questionnaire/License Application Materials
The first required submission in the Early Stage Licensing process
is SBA's MAQ. The MAQ consists of two forms that cover qualitative and
quantitative information on the management team, the proposed strategy
for the SBIC, the principals' investment track record, and the proposed
fund structure and economics. The MAQ consists of SBA Form 2181 and
Exhibits A-F of Form 2182.
Should SBA issue you a ``Green Light letter,'' you must submit the
SBIC License Application, consisting of SBA Form 2181, 2182 and 2183
(updated to reflect any changes), for the final licensing phase.
Exhibit O in SBA Form 2183 includes the fund's limited partnership
agreement (``LPA''). Applicants should review this notice for special
instructions associated with the LPA for Early Stage SBICs.
III. Early Stage Licensing Process
There are four stages in SBA's Early Stage Licensing Process: (A)
Call Period; (B) Initial Review; (C) Applicant Fundraising and Document
Preparation; and (D) Licensing. Each of these stages is discussed
below.
A. Call Period. This notice signals the start of the Fiscal Year
2014 Early Stage SBIC call period. SBA intends to hold one Early Stage
SBIC call period for accepting MAQs per fiscal year and SBA will issue
a new notice in the Federal Register for the next call period.
Interested parties should download a MAQ from www.sba.gov/inv/MAQ. You
should also review the information at www.sba.gov/inv/earlystage which
includes a list of frequently asked questions (``FAQs'') regarding the
Early Stage Initiative. If you still have questions regarding the Early
Stage process, please email your questions to erikka.robinson@sba.gov.
SBA will endeavor to respond to your question within three business
days, depending on volume. SBA may not be able to respond to fund-
specific questions or questions that require a legal opinion. SBA will
not take any further questions after the end of the Question and Answer
Period identified under the Dates section.
B. Initial Review. At the end of the Initial Review phase, SBA will
issue a Green Light letter to those applicants that have preliminarily
met the evaluation criteria for an Early Stage SBIC, including the
vintage year and geographic diversification criteria. The process for
SBA's Initial Review is as follows:
1. Submit MAQ. SBA must receive your completed MAQ no later than
the date and time specified under the Dates section of this notice. SBA
will send a confirmation that it has received your MAQ within three
business days of your submission. If you have not fully completed all
sections of the MAQ or provided sufficient information to allow SBA to
evaluate your management team, you may be ineligible for this call
period. If so, SBA will notify you by email.
[[Page 6666]]
2. Due Diligence. SBA will review all MAQs against the evaluation
criteria identified in this notice. SBA may engage a contractor to
assist in evaluating MAQs received in response to this Call. The
Investment Committee (composed of senior managers from the Office of
Investment and Innovation) will consider each MAQ, and if the
Investment Committee concludes that the management team may be
qualified for an Early Stage SBIC license, the entire team will be
invited to SBA Headquarters at 409 Third Street, SW., Washington, DC
for an interview. Those applicants not invited for interviews will be
notified. After September 30, 2014, SBA will provide feedback upon
request to applicants not selected for an interview.
3. Interview Period. SBA's invitation for an interview will
identify a 1-hour time block during the Interview Period identified in
the Dates Section, along with the topics that the applicant should be
prepared to address. SBA will conduct interviews at SBA Headquarters.
Applicants seeking to be licensed by the end of the fiscal year--
i.e., September 30, 2014--must bring the following completed exhibits
from SBA Form 2182 to the Interview:
a. Exhibit G--Fingerprint cards and
b. Exhibit I--Statements of Personal History.
If the applicant receives a Green Light letter, SBA will forward
the fingerprint cards and Statements of Personal History to SBA's
Office of Inspector General for processing by the FBI.
4. Green Light Letter. Following the interview, the SBA will issue
a Green Light letter to all applicants that have met the criteria
identified in this notice, as determined by the Investment Committee.
Applicants approved by the Investment Committee can expect to receive
the Green Light letter via email within a few days of the Investment
Committee's decision. The Green Light letter formally invites an
applicant to submit its application for an SBIC License. The Green
Light letter is only an invitation to proceed to the next stage in the
process, not a guarantee that a fund will be issued an Early Stage SBIC
license. Those applicants that do not receive a Green Light letter will
also be notified by email within a few days of the Investment
Committee's decision. After September 30, 2014, SBA will provide
feedback upon request to those applicants that do not receive a Green
Light letter.
C. Fundraising and Document Preparation. If you receive a Green
Light letter, you will need to raise the minimum Regulatory Capital
needed to execute your strategy (which can be no less than $20 million)
and submit your completed license application within one year from the
date of the letter.
1. Raise Regulatory Capital. An Early Stage SBIC applicant must
have signed capital commitments for at least $20 million in Regulatory
Capital prior to filing its license application.
2. SBIC Education. All principals of the Early Stage SBIC applicant
must attend a one-day SBIC Regulations training class. This training is
held at least three times per year in Washington, DC. The purpose of
this class is to familiarize principals with the SBIC rules,
regulations and compliance procedures. Although an applicant may
receive a license before all principals have completed the training, a
majority of principals must do so before licensing and all must do so
before a licensed Early Stage SBIC will be permitted to draw leverage.
Information concerning registration for classes can be obtained at
www.sbia.org. Certain non-principals such as members of a board of
directors may also be required to take the class. In addition, any
employees or consultants whom you have assigned to handle regulatory
matters or to interact with the Office of Investment and Innovation
should attend the class.
3. Finalize Documents & Perform Checklist. The following items must
be completed and submitted in order to proceed to the Licensing phase:
------------------------------------------------------------------------
Item [msquck]
------------------------------------------------------------------------
Updated SBA Form 2181........................
SBA Form 2182 & 2183.........................
At least $20 million in Regulatory Capital
evidenced by signed Capital Certificate in
Form 2183 (Exhibit K).
$25,000 Non-refundable licensing fee.........
------------------------------------------------------------------------
D. Licensing. During this last stage, SBA will review your
completed application, perform further due diligence and analysis as
needed, and make the final licensing decision. Applicants that receive
Green Light letters in 2014, and wish to be licensed in FY 2014, will
need to submit their completed license application no later than 5 p.m.
EST on June 30, 2014, and follow all guidance identified in this
notice. Applicants that do not comply with the requirements in this
notice risk not receiving a license in FY 2014. All other applicants
must apply within one year of the issuance of their Green Light letter.
The process for Licensing is detailed below.
1. SBA acceptance of license application. Upon receipt of the
application, SBA will acknowledge receipt by email. Within three
business days, SBA will determine whether the application is complete,
meets the minimum capital requirements and satisfies management
ownership diversity requirements. If so, SBA will send the applicant an
acceptance letter. If not, SBA will ask the applicant to resolve the
issues identified.
2. Background and Documentation Review. Once the application has
been accepted, SBA will forward the fingerprint cards and Statements of
Personal History to SBA's Office of Inspector General for processing by
the FBI if the applicant did not previously submit such information
during or after the interview. Following a review of the application
and legal documents, SBA will provide the applicant with a ``comment
letter.'' Applicants must respond in writing to the comment letter.
Applicants seeking to be licensed in Fiscal Year 2014 should make every
effort to respond to SBA's comments within one week. Other applicants
should respond as quickly as possible, but in any event within 30 days.
Failure to address all comments to SBA's satisfaction will slow down
the licensing process. Please note that pre-licensing investments,
which SBA must review and approve before they are closed, will also add
to the licensing time.
3. Divisional Licensing Committee. After SBA's licensing staff and
Office of General Counsel have completed their review, the license
application is presented to the Divisional Licensing Committee. This
committee is composed of the senior managers of the Office of
Investment and Innovation. If approved by the Divisional Licensing
Committee, the application is forwarded to the Agency Licensing
Committee which is comprised of certain senior managers of the SBA.
Prior to consideration by the Agency Licensing Committee, an applicant
must provide a signed, up-to-date capital certificate showing that it
has at least $2.5 million in Leverageable Capital, consisting of cash
on deposit, approved pre-licensing investments funded with partners'
contributed capital, and/or approved organizational and operational
expenses paid out of partners' contributed capital, and at least $20
million in Regulatory Capital. The applicant's bank must certify that
the requisite funds are in the applicant's account and unencumbered.
4. Agency Licensing Committee and Administrator Approval. If the
Agency Licensing Committee recommends approval of your license
application, it will be forwarded to the SBA Administrator or her
designee for final action as soon as you submit fully executed copies
of all legal documents.
[[Page 6667]]
(Please note that the executed documents must be identical to the
``final form'' of the documents approved by SBA.) If the Administrator
or her designee approves your application, your Early Stage SBIC
license is issued.
5. Leverage Commitments. SBA has allocated $200 million in Fiscal
Year (``FY'') 2014 for Early Stage SBICs. SBA expects to allocate
another $200 million in each of FYs 2015 and 2016. SBA expects to be
able to commit the full amount of leverage that an Early Stage SBIC
requests at the time of licensing. If total leverage commitments
requested for the FY 2014 licensing cycle exceed the amount available
in FY 2014, SBA will allocate available leverage across all FY2014
Early Stage SBICs on a pro rata basis. Early Stage SBICs licensed in
FY2014 will be eligible to request the remainder of their uncommitted
leverage request in subsequent fiscal years based on availability.
Early Stage SBICs that raise additional private capital after licensing
may request leverage commitments against that capital. However, such
requests are subject to leverage availability and will not be
considered until all other licensee requests are satisfied.
IV. Early Stage SBIC LPA and Organizational Instructions
A. Early Stage SBIC Model LPA. In order to expedite the review of
Early Stage SBIC license applications, SBA has adopted a Model Early
Stage SBIC Limited Partnership Agreement (``Model LPA''). The Model LPA
includes required provisions shown in Bold Arial type and optional
provisions in a different font. You must download the Model LPA at
https://www.sba.gov/content/model-participating-security-sbic-l.
Applicants must use the Model LPA as a template and must follow the
organizational structure of the Model LPA. Further, Applicants must
include in their limited partnership agreements all of the required
provisions of the Model LPA that appear in Bold Arial type. SBA will
not accept additions, deletions and other changes or modifications to
any of those required provisions. Applicants are required to submit a
copy of their limited partnership agreement black-lined against the
Model LPA, as explained in the instructions provided at the beginning
of the Model LPA. SBA provides the following further guidance on
limited partnership agreements:
1. SBA encourages applicants to adhere to the Model LPA to the
maximum extent possible. Although SBA does not prohibit changes to
those Model LPA provisions that do not appear in Bold Arial type, such
changes must be explained in a narrative accompanying the applicant's
limited partnership agreement. The entire agreement is subject to SBA's
approval.
2. Conditions or restrictions on the ability of the general partner
to call private capital commitments are limited to those permitted by
the Model LPA.
3. Withdrawal rights are limited to those permitted by the Model
LPA.
4. Applicants must adhere to SBA's management fee policies
available at https://www.sba.gov/sites/default/files/files/SBICTechnote07arev200804.pdf. This policy sets a maximum allowable
management fee only. The actual management fee will be set by
negotiation between the management team and the limited partners and
may be less than the maximum. Early Stage SBIC applicants should be
aware that the calculation of an SBIC's capital impairment percentage
is affected by all fund expenses, including management fees. SBA will
consider the management fee in its licensing evaluation criteria as
part of fund economics. SBA believes that the primary incentive for
fund managers should be carried interest rather than fees.
5. The designation of fund expenses and expenses to be paid out of
the management fee must be consistent with SBIC program regulations
(see 13 CFR 107.520).
a. Organizational costs, expenses incurred in applying for a
license and forming the SBIC and its entity general partner (but not
its parent fund or any other affiliate), are considered a partnership
expense. Organizational expenses typically include items such as the
licensing fee, cost of legal and other professional and consulting
services, travel and other fundraising expenses, costs of preparing,
printing and distributing the private placement memorandum or other
offering materials, and other related expenses such as telephone and
supply costs. SBA strongly encourages applicants to include in the LPA
a reasonable cap on the total organizational costs to be paid by the
applicant. Costs that SBA deems excessive can be paid by an affiliate
of the applicant or deducted from the applicant's Regulatory Capital
prior to licensing (Regulatory Capital must still be at least $20
million after the deduction).
b. Unreimbursed expenses on deals that do not close may be
designated as a partnership expense but must be capped at a reasonable
level.
6. Right of limited partners to remove general partner--Provisions
allowing removal of the general partner without cause (``no-fault
divorce'' provisions) are permitted only after the Early Stage SBIC has
repaid all outstanding leverage and any other amounts payable to SBA
and has surrendered its SBIC license.
7. Any amendments to the limited partnership required by SBA must
be executed before licensing. Any amendments initiated by the applicant
during the licensing process must be submitted to SBA in draft form as
early as possible. SBA will not consider amendments to an Early Stage
SBIC's LPA for a minimum of six months after licensing.
B. Organization. Early Stage SBIC applicants must adhere to the
following rules regarding organizational structure:
1. Applicant cannot be a BDC or other public entity or a subsidiary
of any such entity.
2. All provisions governing the operation of the SBIC must be
included in the limited partnership agreement. A side letter between
the applicant (or its general partner) and an investor may supplement
the limited partnership agreement but may not supersede it. In the
event of a conflict between the limited partnership agreement and the
side letter, the limited partnership agreement shall control. If an
investor requests a side letter provision that is of general interest
to all investors (e.g., a provision regarding the fund's efforts to
invest in certain geographic areas), that provision should be
incorporated into the limited partnership agreement. All side letters
require SBA's prior written approval.
3. Applicant must adopt SBA Model Valuation Guidelines.
4. Drop-down SBICs
a. The drop-down structure should be used only when it has a clear
business purpose:
i. Example 1--Parent fund has already raised capital and begun
operating and wants to commit a portion of its capital to an Early
Stage SBIC.
ii. Example 2--Substantial capital will be retained for investment
at the parent level (SBA suggests that managers consider the
alternative of structuring a non-SBIC fund side by side with the SBIC).
b. Drop-down funds must have one parent fund only and the parent
fund must be a U.S. entity.
c. Parent must qualify as a traditional investment company based on
established SBA precedent.
d. Parent must disclose the identity of all of its investors.
e. All of the investors in the parent fund (the SBIC's ``Class A''
limited partner) must agree to be ``Class B'' limited partners of the
SBIC with an obligation to fund the Early Stage SBIC capital calls if
the Class A limited partner does not. The obligation of the
[[Page 6668]]
Class B limited partners to the Early Stage SBIC is reduced dollar for
dollar as the parent fund contributes capital to the SBIC. The Model
LPA contains required provisions for drop-down funds.
f. The Class B limited partners' commitments to the SBIC applicant
must be expressed as a specific dollar amount (not just as the
``proportionate share'' of parent fund's commitment).
g. The total dollar amount of Class B commitments must be equal to
the Class A limited partner's unfunded commitment to the SBIC. SBA will
not require Class B commitments if the SBIC's Regulatory Capital will
not include any unfunded commitments from the Class A limited partner.
C. Capitalization. Applicants must raise the minimum $20 million in
Regulatory Capital by the time the license application is submitted.
1. Capital commitments from limited partners must be made directly
to the SBIC (and its parent fund, in the case of a drop-down) with no
intermediaries involved.
2. The Early Stage SBIC applicant must have the unconditional
ability to legally enforce collection of each capital commitment.
3. Capital Certificate. Capital commitments must be documented in
the capital certificate (Exhibit K of SBA Form 2183) and comply with
the following:
a. A signed Capital Certificate must be submitted with the license
application.
b. The only permitted condition on private capital commitments is:
i. Receipt of Early Stage SBIC license.
c. Individual investors must list primary residence address, not a
business address.
d. Street addresses are required (no P.O. Box addresses).
4. A dual commitment may be obtained to back up the commitment of
any direct investor in the SBIC who is not an Institutional Investor.
5. Capital commitments by the principals, general partner, or their
affiliates must be payable in cash when called (cannot be satisfied
with notes or management fee waivers).
D. General Partner
1. All principals must:
a. Hold direct ownership interests in and be the direct individual
managers of the general partner, with no intervening entities.
b. Receive carried interest directly from the general partner; for
drop-down SBICs, carried interest may be received from the parent
fund's general partner.
2. A maximum of 25% of the carried interest may be allocated to
non-principals.
3. Any provision to remove or terminate a principal must be spelled
out within the general partner's organizational document and must not
be tied to events occurring under other agreements (e.g., a principal's
employment agreement with the management company).
E. Investment Advisor (``Management Company''). Ownership of the
Management Company that is highly disproportionate to the ownership of
the general partner (e.g., one principal is the 100% owner) is not
viewed favorably by SBA, but may be acceptable if there are adequate
checks and balances on the powers of the dominant owner. Areas that
cannot be subject to unilateral decision-making include the following:
1. Power to remove or terminate other principals.
2. Power to change the composition of the Early Stage SBIC's
investment committee.
V. Early Stage SBIC Licensing Evaluation Criteria
A. General Criteria. SBA will evaluate an Early Stage SBIC license
applicant based on the submitted application materials, Investment
Committee interviews with the applicant's management team, and the
results of background investigations, public record searches, and other
due diligence conducted by SBA and other Federal agencies. SBA will
evaluate an Early Stage SBIC license applicant based on the same
factors applicable to other license applicants, as set forth in 13 CFR
Sec. 107.305, with particular emphasis on managers' skills and
experience in evaluating and investing in early stage companies. As
discussed in the Final Rule, evaluation criteria fall into four areas:
(A) Management Team; (B) Track Record; (C) Proposed Investment
Strategy; and (D) Organizational Structure and Fund Economics. You
should review these regulations prior to completing your MAQ.
B. Managing SBA Leverage. SBA will pay particular attention to how
a team's investment strategy works with proposed SBA leverage. Early
Stage Debenture leverage either requires a 5 year interest and annual
charge reserve from the date of issue or is structured with an original
issue discount that covers the interest and annual charges for the
first 5 years. In either case, Early Stage SBICs must identify how
quarterly interest payments beginning in the 6th year from Debenture
issue will be met. Sources of liquidity to make interest payments may
include (a) private capital; (b) realizations; or (c) current income.
As part of your plan of operations, you should carefully consider how
your investment strategy will work with SBA leverage and make
appropriate suggestions to manage risk. Risk mitigation strategies
might include making some investments in current pay instruments,
taking down less than a full tier of leverage (i.e., leverage less than
100% of Regulatory Capital), taking leverage down later in the fund's
life, lowering management expenses, and reserving more private capital.
The strategies you choose to employ should be appropriate for your
management team's track record and investment strategy.
C. SBA Diversification Rights. Per 13 CFR 107.320, SBA reserves the
right to maintain diversification among Early Stage SBICs with respect
to (i) the year in which they commence operations (``vintage year'')
and (ii) geographic location.
1. Vintage Year Diversification. Vintage year has a major impact on
the return expectations of a fund and excessive concentration in a
single year could substantially increase program risk. Therefore, SBA
reserves the right, when licensing Early Stage SBICs, to maintain
diversification across vintage years. SBA believes that it will be able
to manage vintage year diversification through its call process. If SBA
receives an extraordinary number of qualified applicants in FY 2014, it
may not approve all such applicants.
2. Geographic Diversification. All Early Stage SBICs must first
meet SBA's basic licensing criteria. After those criteria are met, SBA
reserves the right to maintain diversification among Early Stage SBICs
with respect to the geographic location in which the Early Stage SBIC
expects to invest.
Javier Saade,
Associate Administrator, Office of Investment and Innovation.
[FR Doc. 2014-02225 Filed 2-3-14; 8:45 am]
BILLING CODE 8025-01-P
